£250 nest-egg for babies

Lump sum payments for all newborn babies moved a step closer yesterday.

The Government plans to deposit money into savings accounts under the so-called 'baby bonds' scheme.

Gordon Brown announced the introduction of Child Trust Funds as part of a drive to give children from poorer families 'a better start in life'.

Under the plan, originally unveiled in 2001 and based on an American model, every baby will receive an initial endowment of at least £250, rising to £500 for those from low-income families.

Baby bond accounts are expected to be available from specially-authorised savings firms by 2005, although the Chancellor said the payments would be backdated to September 2002.

The idea is that the money will grow in a savings account and ideally be used to help pay for youngsters' college fees or training.

As children grow up, parents, relatives and friends will be able to make extra contributions to the fund up to an annual limit of £1,000.

Ministers are also looking at the possibility of the State making supplementary payments at key stages during the school years.

The cash will become available when children reach 18, with no restriction on what the money is used for - although the Government hopes that education will be the top priority.

Experts say that, in theory, the Child Trust Fund could have a significant long-term effect on the finances of a child, giving poorer children some of the security enjoyed by middle-class youngsters.

According to Virgin Money, two-thirds of families would be eligible to claim the full £500. If this money was invested and grew at 7 per cent per year, the fund would be worth £1,410 when the child reaches 18.

If parents or grandparents topped up the fund by just £10 a month, Virgin estimates that the amount saved could grow to £5,210.

But it said the key to the scheme succeeding would be the Government encouraging families to top up the initial endowment.

Critics, however, said they would be 'very surprised' if any baby bond scheme could afford to offer such a high rate of return.

Behind the scenes, the plan has proved somewhat controversial.

Mr Brown fears that wealthy parents could use the fund as a tax- saving dodge, which is why parental contributions are limited to £1,000 a year.

In addition, the Government - made nervous by three years of stock market falls - is to consult on whether funds should be limited to 'safe' investments such as deposit savings accounts.

The scheme received a mixed reaction from child poverty campaigners. Martin Barnes, director of the Child Poverty Action Group, said it is ' promising poor families jam tomorrow rather than today'.

He added: 'We welcome the step, but it doesn't do anything about child poverty today.

'We would have liked to have seen the Chancellor announce an increase in the child tax credit.'

Mr Barnes pointed out that Labour is committed to halving child poverty by 2010 and eradicating it within a generation.

But he said the Government is in 'severe danger' of missing even its first milestone target of reducing child poverty by a quarter by 2004-2005.

Mary MacLeod, chief executive of the National Family and Parenting Institute, said the fund could be useful when a child reached 18.

She added: 'We hope that in the future many young people will benefit from having useful savings to ease what can be a very challenging time.'

The Institute for Public Policy Research - the pro-Labour think-tank that first dreamed up the baby bonds idea - welcomed the 'commitment to implementation of the funds'.

A Treasury spokesman said last night that all babies born from September 2002 would be entitled to the money from that date. But the cash would remain in the Government's coffers until savings firms such as banks and building societies started offering the Child Trust Funds in 2005.

Final proposals would be published in the summer setting out the specifications for how much families could put in as additional contributions.

Asked whether families would lose the interest they would have received if the accounts had started yesterday, the spokesman replied: 'It is an issue we are looking at.'